MARGARET WARNER: Oil prices have been rising steadily all year amid growing demand, but the cost of crude oil jumped sharply in recent days, above $90, closing today at more than $91 a barrel. That’s just under $10 shy of the inflation-adjusted record high set in 1980 during the Iranian hostage crisis.

This week’s price hike comes amid more tensions in the Middle East, including new, expanded U.S. economic sanctions on Iran, and hostilities along the border between Turkey and Kurdish northern Iraq.

Here to tell us more about what’s happening with oil prices are Robert Lieber, professor of government and foreign service at Georgetown University. He is the author of “The Oil Decade.” And John Kilduff, energy analyst at MF Global, a brokerage firm.

Welcome to you both, gentlemen.

John Kilduff, what do you attribute — to what do you attribute this spike we’re seeing in oil prices, just close to 8 percent in the last 48 hours? Do you think it’s being driven, as many have speculated today, by the combination of the Iranian situation and the Turkey-Iraq situation?

JOHN KILDUFF, Energy Analyst, MF Global: Most certainly. Good evening. It’s clearly those two elements. Those are sort of the sizzle that’s in this market right now that are causing various investors, speculators, and even those in the oil industry who use the tools of the New York Mercantile Exchange and other facets to hedge their exposure to buy up crude oil on paper right now in advance of what are some very serious threats to major supply outlets in Iran and northern Iraq and, for that matter, the cross-Turkey pipeline. That’s another 700,000 barrels of crude oil for the Western markets.

MARGARET WARNER: Professor Lieber, what do you attribute this to?

ROBERT LIEBER, Georgetown University: It’s a combination of politics and markets. On the market and economic side, the supply-demand balance is tight, but there is very little surplus capacity in the event that some of the existing supplies are somehow interrupted.

In the past, when there’s been a political crisis or even a war, as long as there were available shut-in capacity that could be brought online, then it tended to tamp down the increase in prices. But in this case, because the market is so tight, any rumor, anxiety and someone can drive prices up in a great hurry.

Supply-demand linked to politics

MARGARET WARNER: So, in other words, the tight global supply-demand picture is inextricably linked to the political tensions?

ROBERT LIEBER: That's right. That's why I mentioned it's a combination of politics and markets. You can't get a handle on this unless you combine both elements, and a lot of people don't and go off in the wrong direction, trying to make sense of something like what we're seeing now.

MARGARET WARNER: Do you agree, John Kilduff, that it is the relationship between the two phenomena?

JOHN KILDUFF: No question. There's zero room for error. I would agree with the professor totally. I'm not sure there's any spare capacity left at this point.

We saw OPEC, for example, suspend individual country quota limits last month because there's so many countries now having trouble meeting their actual quotas. And we see threats to supply really from all quarters, by choice or by circumstance.

In Venezuela, Nigeria -- I know on your program, you talk about it all the time, the unrest there in the Niger Delta that's knocking off millions of barrels of crude oil every day. We see President Putin threatening at times to use oil as a weapon. So we're seeing speculators and hedgers bid up the price because of the uncertainty of future supplies, in particular.

MARGARET WARNER: So, Professor, let's take the Iran situation, the U.S.-Iran tensions. What specifically are oil traders worried about? What do they think might happen?

ROBERT LIEBER: Well, it's wild speculation. The reality is, there ain't going to be an attack on Iran anytime soon.

MARGARET WARNER: That's a bold prediction.

ROBERT LIEBER: Trust me.

MARGARET WARNER: Anytime soon.

ROBERT LIEBER: Trust me, anytime soon. It could happen eventually, if the Iranians continue to pursue their program. But in the coming months, it's just not going to happen.

Nonetheless, there are anxieties about it. If a conflict of some sort broke out, it's certainly conceivable it could interrupt the Iranian oil shipments, it could affect the oil coming out of southern Iran. You could get the Iranians trying to retaliate against oil facilities on the other side of the gulf.

Anything that would suddenly reduce oil coming out of the Middle East would trigger an explosive increase in world oil prices. So I think that is affecting the markets at the present time.

Iran rhetoric fuels anticipation

MARGARET WARNER: So, John Kilduff, if it's true that there would not be an attack on Iran in the next several months, would you consider the scenarios that have been sketched out to be excessive, or is this prudent, as you described it, hedging or anticipation on the part of oil traders?

JOHN KILDUFF: Well, I think at this point, the problem we have, despite the professor's assertions, is statements from the president and the vice president, almost on a daily basis lately, really raising the rhetoric, raising the temperature on the situation. And, of course, President Ahmadinejad in Iran does not shrink from these verbal battles anyway.

And this is the mother of all supply fears, the mother of all supply threats. Not only the Iranian oil, but the Strait of Hormuz, where 25 percent of the world's oil flows, that's 100 percent Western-friendly, could easily be blocked by the Iranians.

So, I mean, yes, there could be an overreaction right now, but we in the oil markets have to call them as we see them and take what we get in terms of rhetoric and worry.

So, for now, I think the reaction is actually fairly modulated. And if we wake up in the morning, one of these mornings, where there is a U.S. air strike of some kind on Iran, we are easily looking at prices approaching $130; $150 a barrel wouldn't be out of the question.

MARGARET WARNER: And, Mr. Kilduff, speaking of strikes, go now to the Turkey-Iraq border. How much oil is really at stake there? Or is this a function of, even if not a lot of oil is at stake, again, because there's no elasticity in the market, any potential threat roils the whole situation?

JOHN KILDUFF: Well, any potential threat, and even if you try to anticipate everything, there was word out of the Iraqi government that they would shut off their oil flow through Turkey if Turkey invaded. So now we have the Iraqis threatening that, the Kurdish Workers Party, of course, threatening that same oil infrastructure if there's an attack, also threatening the trans-Turkey pipeline that runs from Ceyhan out to the Caspian Sea, as well as, of course, the Turks threatening an attack in that region.

So the calculus there is myriad, in terms of our worries and pricing this in. So that's, again, what the market is worried about.

On that trans-Turkey pipeline, we're talking about 700,000 barrels a day. The northern Iraq infrastructure, it's around 1.2 million barrels a day when it's on. It hasn't really been working operationally since the war, so that is really not oil that's in any kind of part of our calculus at this point.

Impact on gas, heating costs

MARGARET WARNER: So, Professor Lieber, what about the role of speculation in this? You read about so much money, investment money, pouring into the energy sector. How much of this is "speculation," quote, unquote?

ROBERT LIEBER: They're only wild guesses. People on Wall Street would probably have a better take on it, but some of the guesses suggest that somewhere between $5 and $15 a barrel might be either a speculative premium or a risk premium or represent investment.

But it's worth noting that prices are set at the margins. Prices have escalated very sharply, as you mentioned at the beginning of this piece, but it's also possible, as tensions ease, that prices could drop just as swiftly as they've risen.

MARGARET WARNER: And then, Professor, let's talk about how this is going to affect consumers. At what point does this really translate at the gas pump, and in terms of what it will cost to heat your home this winter?

ROBERT LIEBER: It's going to have its effect at the gas pump and home heating oil. It's going to be painful. But it's worth noting that, compared to a generation ago, oil is only half as important to our economy as it was then.

For every dollar of gross domestic product now, we only use half as much oil as we did then. So the run-up in prices, which is getting close to the inflation-adjusted high, doesn't have the same kind of impact it had during the two shocks of the 1970s.

MARGARET WARNER: But if it hits $100 a barrel?

JOHN KILDUFF: A hundred dollars a barrel now would equal right about what it was in the spring of 1980. But the difference is, because you only use half as much oil per unit of GDP, the overall effect on the economy will be less, even though it can be very painful for individual homeowners and drivers.

Damage to consumer sentiment

MARGARET WARNER: John Kilduff, how concerned do you think consumers should be about the months ahead?

JOHN KILDUFF: I think they should be concerned. I agree with the professor that the real numbers do break along $130, $140 oil before we've replicated the real pain of that 1980 spring.

However, I think, psychologically, consumer sentiment would be badly damaged by just $100 oil. There is a significant price spike coming to the gasoline pump over the next couple of weeks, upwards of 20 cents or 30 cents a gallon. If we continue to see rising oil prices as we have, that will quickly go to 50 cents, 60 cents a gallon.

Home heating oil consumers are seeing the worst of it. They're going to be paying upwards of 50 percent more than they did last year. And they're paying record prices as we sit here.

So I think, again, psychologically, consumer sentiment that's already been beat up by the mortgage situation, by the unemployment picture that's been worsening to a relative degree, badly damaged.

MARGARET WARNER: And, John Kilduff, brief final prediction, actually from both of you, where do you think prices will settle by year's end?

JOHN KILDUFF: Well, I've been forecasting now for some time that we're going to see $100 oil before the end of the year. Whether or not that will be enough to wring out some of the speculative angst, get some profit-taking going in the market where people actually sell and say, "I've had enough of this," and get out, it remains to be seen.

But I'm looking for $100 before the end of the year, with likely lower prices in '08 after some of the economic damage is wrought.

MARGARET WARNER: And Professor Lieber?

ROBERT LIEBER: If I knew the answer, I would make a fortune speculation. What I will say is there's not going to be an attack on Iran before the end of this calendar year.

MARGARET WARNER: We'll keep that in mind. Professor Robert Lieber and John Kilduff, thank you both.

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